Uphill Battle for Charity Tax Breaks

Recession and terrorism force nonprofit groups to pare expectations for incentives to encourage giving

As the second session of the 107th Congress begins in earnest this week, nonprofit

officials are weighing how hard to push for new tax incentives to increase charitable giving. Despite a rosy outlook last year, proposals many charities have long favored failed to win passage.

With the national economy in recession, projected federal surpluses all but evaporated, and the diversion of federal spending to fight terrorism, many legislative analysts say the prospects for major tax legislation making it into law this year seem slim.

Charities may also be in a weakened position to ask for favors this year as some members of Congress raise questions about their operations.

A senior Republican aide on the Senate Finance Committee says that any new giving incentives are likely to be combined with tougher financial-disclosure requirements for charities. The aide, who declined to be named, says that the Congressional hearings last fall questioning how the American Red Cross and other charities were spending the flood of donations they received after September 11 point to a need for greater public disclosure.

Senator Charles E. Grassley of Iowa — the top Republican on the Finance Committee, who has asked the General Accounting Office to report this spring on how charities raise and spend funds — wants to make sure that donors know where their money goes, says the Senate aide. He adds that new requirements could include many of the recommendations made by the Joint Committee on Taxation two years ago, such as making public Internal Revenue Service audits and other documents that would provide information on a charity’s inner workings.

Strong Supporters

Still, charitable-giving proposals have some strong supporters. President Bush has continued to push for the incentives, and many people expect him to include the tax changes as part of the budget proposal he sends to Congress next month.

Senators Rick Santorum, Republican of Pennsylvania, and Joseph I. Lieberman, Democrat of Connecticut, are currently working with the White House to draft a bill that would incorporate several giving incentives popular among charity officials.The Senators have not yet introduced a bill, but an independent committee formed at Senator Santorum’s request released a report last week that made several tax recommendations for how government can increase its support of nonprofit organizations.

Charity measures most likely to receive consideration this year, say lawmakers, nonprofit lobbyists, and Congressional staff members, would:

• Allow donors to give money to charity directly from their individual retirement accounts without incurring taxes.
• Permit corporations to write off as much as 25 percent of their taxable income for charitable contributions each year, an increase from the current 10 percent permitted.
• Lower the rate of excise tax private foundations must pay on their net investment income, from the current 2 percent to 1 percent. Supporters of the measure say that reducing the tax would help foundations increase the amount they spend on grants to charities.
• Expand existing tax breaks that encourage businesses to give in-kind donations, such as food, books, and computers to charities.
• Provide a charitable deduction to people who don’t itemize the deductions on their tax returns. About 70 percent of taxpayers currently do not itemize.

This last proposal — which Independent Sector, a coalition of major charities and foundations, made its top priority last year — will face the biggest hurdle. Its high price tag (estimated by Congress to be $84-billion over 10 years), combined with the federal budget crunch, opposition by tax experts, and second thoughts by some charities, bode poorly for a full deduction for non-itemizers becoming law.

Strategy Shift

Recognizing the change in legislative climate, Independent Sector has shifted its strategy from asking for a permanent tax break for non-itemizers to its current proposal for one that would last just a couple of years. Patricia Read, the coalition’s vice president, says that it would be up to charities to then demonstrate that the tax change is worth its cost. “We’d have two or three years to work on donor education,” she says.

Independent Sector also is actively supporting the IRA rollover, Ms. Read says. As for the disclosure requirements, “We’re anxious to see what will be recommended this year,” she says. Some charities fear that new requirements could prove overly burdensome and do little to serve the public interest. On the other hand, “Independent Sector has supported some of the Joint Committee’s recommendations in the past,” Ms. Read says.

Independent Sector plans to turn some of its attention to the states in hopes of winning state charitable tax deductions for people who do not itemize. Minnesota, North Carolina, and Colorado instituted their own versions of the deduction a few years ago. Independent Sector hopes to use those laws as a model to help other states develop their own deductions, Ms. Read says.

The Senate Finance Committee aide says Congress might endorse a limited version of the non-itemizer deduction, one that either permits donors to deduct only a portion of charitable gifts or is very temporary. But he says charities so far have failed to persuade lawmakers that there is much demand for it.

Tax aides in both the House and the Senate say the Bush administration will have to become more involved this year if it hopes to see any initiatives passed. “It’s not going to gain any momentum if the White House stays as quiet as it did last year,” says a Republican aide on the House Ways and Means Committee.

Drumming up support for such measures among charities could prove tough in the coming months.

Organizations such as the Evangelical Lutheran Church in America, whose bishop last fall wrote Congress urging passage of the non-itemizer provisions, now say that, because of the recession and the demands placed on social-services groups as a result, it makes more sense for the government to spend its money on social programs rather than on offsetting tax cuts that might not bring charities much money.

“When you’ve got all these needs, wouldn’t it be better to put those funds into charitable services, rather than try to encourage charitable giving?” says Kay A. Bengston, assistant director for domestic advocacy in the church’s governmental affairs office. Her organization represents about 11,000 Lutheran congregations, synods, schools, seminaries, social-service agencies, and other groups.

Less-Expensive Measures

Some charity leaders have started to conclude that other, less expensive tax incentives would do more to stimulate giving than a deduction for non-itemizers. In an informal ranking of the effect on giving of various incentives, C. Eugene Steuerle, a senior fellow at the Urban Institute, a Washington think tank, says the IRA charitable rollover plan probably would be more effective at raising new money than any other charitable incentives being considered. The Joint Committee on Taxation has estimated that allowing people over age 59-1/2 to give directly from their IRAs would cost $3.7-billion in lost revenue over 10 years. It could raise $1.9-billion for charity over the same period, according to a Congressional Research Service estimate.

Sheldon E. Steinbach, vice president and general counsel of the American Council on Education, agrees. “Universities and museums are greatly dependent on the large gift,” he says. “People have IRAs they don’t need that they’d be willing to donate if there were no tax consequences.”

Economists question how much charities would benefit from the non-itemized deduction. Independent Sector has promoted a study it commissioned by PricewaterhouseCoopers that estimated that it would bring charities $14.6-billion a year in additional gifts, more than double the cost of the provision.

But other studies make less optimistic assumptions about how the deduction would affect donors’ behavior. The Urban Institute calculated that taxpayers who were moderately influenced by the fact that their gifts were deductible would have given an additional $5.5-billion in 1995 (the most recent year for which complete tax information was available), about five-sixths of the $6.2-billion the deduction would have cost the government if a deduction had existed that year.

When the deduction is limited to a portion of charitable gifts, the benefits are even less. The House last summer passed a bill that would allow taxpayers who do not itemize to deduct the first $25 of their gifts during the first year the bill took effect, an amount that would have risen to $100 by 2011. The Congressional Research Service estimated in a report published last fall that the $25 deduction would only gain charities 3 cents for every dollar lost to the government.

Independent Sector argues that reasons for supporting a deduction for non-itemizers go beyond a desire to spur giving. “We believe it will increase charitable giving, but we also believe there are some important principles at stake,” says Peter Shiras, senior vice president at Independent Sector. “Every American should have the ability to deduct charitable contributions. It’s a matter of equity.”

Mr. Shiras says that just as the deduction for mortgage payments shows the importance government places on home ownership, the deduction for gifts “is a reminder to people about the value we place on charitable contributions.”

Donald C. Alexander, a former IRS commissioner, disagrees with the premise that a charitable deduction is needed to be fair to non-itemizers. He says the standard deduction already includes an allowance for charitable gifts. The additional tax break, he says, would therefore allow people who don’t itemize to effectively deduct their charitable gifts twice: once when they take the standard deduction, and again when they claim charitable deductions separately.

Many charities have begun to have second thoughts about whether the non-itemizer deduction, especially a limited one, will be worth the fight this year.

Gary Bass, executive director of OMB Watch, which monitors government spending, said that a meeting with charity leaders last summer to discuss the House bill that contained the $25 deduction for non-itemizers led to the realization “that there needed to be a more thoughtful dialogue among all of us on what our priorities should be.”

As much as anything, the debate over the non-itemizer incentive may illustrate how difficult it is for charities to develop a unified lobbying campaign.

“As collaborative as we can be, we don’t really have strong coalitions,” says Virginia Hodgkinson, a research professor at Georgetown University’s Public Policy Institute. “The challenge to charities is really to build these strong coalitions in the future, in which there is an agreed-upon agenda. Otherwise, I don’t think we’re going to have the impact on public policy we need to have.”

OUTLOOK FOR PHILANTHROPY: KEY ISSUES PENDING IN CONGRESS

Issue: CHARITABLE DEDUCTIONS FOR COMPANIES

Issue:CHARITABLE DEDUCTIONS FOR INDIVIDUALS

Issue:FAITH-BASED GROUPS AND FEDERAL AID

Issue:NATIONAL SERVICE

Issue:RETIREMENT ACCOUNTS AND CHARITIES

Issue:TAX TREATMENT OF FOOD DONATIONS